The Impact of Market Competition on Consumers Every Time You Shop!
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Presentation Transcript
Chapter Seven Market Structures: Why market competition affects you every time you shop!
Rule of Business: • The more competitive the industry, the more the consumer benefits. • Market Structure-econ model of competition among businesses in the same industry
Rule of Capitalism: • Encourage competition between firms in an industry (market). • The consumer benefits: • $$$ • Variety of products • Lots of information about products
Two types of markets are highly competitive. • Perfect competition • Monopolistic competition
Perfect Competition • According to Adam Smith – the ideal market structure. • Buyers and sellers compete fully and directly under the laws of supply and demand.
Conditions for Perfect Competition (5) • Numerous buyers and sellers • Standardized product • Freedom to enter and exit markets • Independent buyers and sellers • Well-informed buyers and sellers
Numerous Buyers and Sellers: • No single buyer or seller has enough power to control demand, supply or prices. • Think farming!
Standardized Products • Corn is corn. Apples are apples. • Buyers choose one product over another primarily based on price – not on unique characteristics.
Freedom to enter and exit markets • For sellers to compete perfectly, they must be able to enter a profitable market - or exit an unprofitable market – EASILY. • THINK FARMING!
Independent buyers and sellers • Buyers can’t join other buyers and sellers can’t join other sellers to influence the price
Well-informed Buyers and Sellers • Buyers are knowledgeable about products. • Can compare products easily. • Sellers know what competitors are charging
Competition in the Real World • Imperfect Competition-markets have few sellers or products that are not standardized. • No perfectly competitive markets. • Examples? • corn
Monopoly • There is only one seller of a product and there are no close substitutes • Rare • Cartel-group that acts together to set prices and limit output.
Monopoly • They are the price maker • No competitors to compete with, they determine prices • Barriers to entry-makes it difficult to enter the market
Monopoly: characteristics • Only one seller • De Beers • Restricted, regulated market • Local electricity • Control of prices • Created shortage (with-held Diamonds)
Types of Monopolies • Natural-occurs when the costs of production are lowest with only one producer • Ex. Electricity • Economies of Scale- the average cost of production falls as the production grows larger
Types of Monopolies • Governmental- government owns or runs the business or authorizes only one producer • Postal Service
Types of Monopolies • Technological- a firm controls a manufacturing method, invention, or type of technology • Polaroid Corporation • Patent-gives an inventor the exclusive property rights to that invention or process for a certain number of years
Types of Monopolies • Geographic- exists when there are no other producers within a certain region • Ex. Professional sports teams • Only gas station in poedunk USA
Monopolistic Competition • Differs in ONE key respect. • Sellers offer DIFFERENT, rather than identical, products. • T-shirts
Monopolistic Competition • Sellers seek to have monopoly-like power by selling a “unique” product. • MOST COMMON MARKET STRUCTURE in the US!
Monopolistic Competition • Like perfect competition – • Many sellers and buyers acting independently. • Similar but differentiated products • Limited control of prices • Easy to enter / exit the market.
Product Differentiation – what makes Monopolistic Competition DIFFERENT. • Sellers in monopolistic competition try to DIFFERENTIATE – point out differences – between their products and competitors.
Nonprice Competition • Sellers compete on a basis other than price. • Compete through advertising and emphasis on brand names.
Nonprice Competition • The main goal of product differentiation is to increase profits. • Convince the buyer to make decision based on nonprice factors – not price alone.
Examples of Monopolistic Competition: • Telephone companies • Airlines • Clothing makers • Hamburger joints • Sodas
Imperfectly Competitive Markets • Oligopolies • Monopolies
Oligopolies • There are a few large sellers that control the production of the good or service. • There are only a few large sellers. • Sellers offer identical or similar products. • Other sellers cannot enter the market easily.
Oligopolies: Few large sellers many buyers • A market (industry) is considered an oligopoly when three or four firms control 70% of the market’s total output.
Oligopolies: Identical or similar products • Each seller has a large share of the overall sales in the market. • So much at stake – less likely to take risks. • Not offering new products.
Oligopolies: Difficult entry and exit in the market • New sellers cannot easily enter the market. • Big start-up costs • Govt. regulation • Consumer loyalty to established products
Oligopolies at work: legal and efforts to control prices. • Nonprice competition to differentiate the products. • Efforts of Kelloggs, General Mills, and Post (80% of the market) create numerous brand names to look like they compete.
Oligopolies at work: legal means to control price • Interdependent Pricing: Base prices on the pricing actions of competitors. • Not only similar products – but similar prices.
Price leadership • The most common form of interdependent pricing. • Largest sellers “set” the price of the product and the competitors follow. • Control the price of the product. • Oligopolies and Monopolies are Price Setters – not price takers as in perfect competition / monopolistic competition.
What happens when competing companies don’t follow along in oligopolies? • PRICE WAR!
Price Wars: • Opportunity Benefits: prices can benefit consumer • Opportunity Costs: Sellers lose money and if the price war is on for long – might be forced out of the market. • Unemployment up • Even less competition in the market
Oligopolies Dark Side: COLLUSION • Sellers secretly agree to set production levels and prices for their products. • ILLEGAL! • Oligopoly behaves like a monopoly. • Higher prices and lower quality for consumer.
Oligopolies Dark Side: Cartels • Sellers openly organize a system of price setting and market sharing. • Illegal in the US.
Infamous Cartels • De Beers Diamonds • Creates scarcity by buying and stockpiling stones from other producers. • OPEC • Been to the gas pump lately?
The good news about cartels • Often unstable and short lived. • Greed makes members break ranks and try to sell more. • Price wars break out.
The ultimate bad guy: Monopolies • There is a single seller • No close substitute goods are available • Other sellers cannot enter the market easily • Prices UP and quality of products DOWN because NO COMPETITION!
Monopolies at Work • Monopoly markets have a great deal of control over prices.
Three Things Limit Monopoly Control Over Setting Prices • Consumer Demand • Potential Competition • Government Regulation
Market Regulation • Government was laissez-faire with business until close to the 20th century.
Regulation • Regulation-set of rules or laws to control business behavior • Antitrust legislation-defines monopolies and give gov’t power to control them • Trust- group of firms combined in order to reduce competition in an industry • Merger-joining of two firms into one firm
The Era of Big Business • Rockefeller, Carnegie, JP Morgan- • Smaller companies were forced out of business or taken over by bigger businesses. • TRUSTS = Big Business
Antitrust Legislation – Govt. takes on Big Business • Sherman Antitrust Act (1890) said govt. could monitor and regulate big business. • Used to break up Standard Oil’s monopoly in 1911. • Today the company is called EXXON of EXXON MOBIL.
Clayton Antitrust Act • (1914) – prohibited specific unfair business practices. • Price Discrimination • Offering different prices to different customers under the same circumstances.
